Investors in many ESG funds are also betting on artificial intelligence—perhaps without realizing it.
The ESG label—which stands for environmental, social, and governance factors—says very little about the type of companies a fund might own. But look under the hood at the top 10 holdings of many ESG funds, and
Microsoft
(ticker: MSFT) and
Nvidia
(NVDA) are bound to be there.
Both companies are riding the AI mania powering stocks this year. On Tuesday,
Nvidia
said revenue was up 206% in its latest quarter, beating Wall Street’s expectations.
“The era of generative AI is taking off,” CEO Jensen Huang said in the press release.
The reason tech stocks feature prominently in ESG funds is the funds aren’t as different from an index as investors might expect.
Most ESG funds hew to their chosen indexes.
They may tilt toward things like tech and healthcare and away from energy or utilities, said Ken Pucker, a professor of practice at The Fletcher School at Tufts University.
“But if you look at the breakdown of holdings, you’ll find Nvidia and Apple and
Microsoft
and
Facebook
oftentimes in the top 10,” he said.
Alyssa Stankiewicz, associate director for sustainability research at Morningstar, said the reason is that many ESG funds are designed to be core portfolio holdings and so are going to track more closely to a broad market index.
The largest U.S. ESG mutual fund, the $26.7 billion
Parnassus Core Equity Fund
(PRBLX), boasts Microsoft as its top holding at about 7% of the fund. That is in line with its benchmark, the
S&P 500.
Alphabet
(GOOGL) and
Apple
(AAPL) are also in the top five. The fund has returned 19% this year, including dividends, slightly outperforming the S&P 500, with annualized total returns of 18%.
The investment in Microsoft traces back to 2018.
“The difference this year is that you have this A.I. narrative,” said Andrew Choi, portfolio manager. “From our perspective, Microsoft is the company that is probably best-positioned to gain from the development, application, and distribution of artificial intelligence products and technologies.”
At the same time, Choi said he is keeping tabs on the risks associated with A.I. and the responsible development of the technologies.
One of this year’s best performing ESG funds is the
Invesco ESG Nasdaq 100 ETF
(QQMG). It is up a whopping 48% this year. Its top holding, as you might have guessed, is Microsoft at about 13% of the portfolio, according to Morningstar. Nvidia is the third-largest holding at 6.2%.
Dimple Gosai, head of U.S. ESG research at BofA Securities, says that while ESG funds generally have always been overweight technology stocks relative to their benchmarks, that has increased since the middle of the year.
It has also boosted returns: ESG indexes have outperformed their traditional peers, she said.
As of October 2023, the U.S. MSCI ESG Leaders Index is up 16%, compared with 14% for the MSCI USA Index. And the S&P 500 ESG index is up 16% versus the S&P 500 index’s 14% gain.
Write to Lauren Foster at [email protected]
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